Guardian: Eurozone must not allow Greece to become another Lehman Brothers

15/2/2015

To many, Greece seems unimportant – just as the collapsed US bank once did. Would letting it go trigger a global crisis?

It’s mid-September 2008. The seventh anniversary of the 9/11 terrorist attacks has just been marked. And an American investment bank called Lehman Brothers is in trouble.

Lehman is not a particularly big bank. It is not thought to be systemically important for the rest of the global financial system. So when the US authorities are unable to find a private-sector buyer for the stricken bank, they allow it go to the wall.

Everyone knows what happened next. Confidence that there would be no contagion from Lehman proved spectacularly misplaced. Within days, the entire global financial system was brought to the brink of collapse. Banks were bailed out, credit dried up and the global economy entered a deep recession from which it has yet to fully recover.

Lehman is a cautionary tale for eurozone finance ministers when they sit down in Brussels on Monday to decide what to do about Greece. Like Lehman, Greece is considered small fry. It is not seen as systemically important. There is confidence that the single currency could cope with a Greek exit.

Well, perhaps it could. Europe’s banks are in better shape than they were two or three years ago. They now have more capital to use as buffers against possible losses. Some of the other countries that were in deep trouble – Spain and Ireland, for example – have turned the corner. The European Central Bank has made it clear that it will do whatever it takes to safeguard the future of the euro, and has backed its words with actions: its quantitative easing programme starts next month.

The financial markets are as one with the central bankers and the finance ministers. If traders thought there were a risk that a Greek exit from the euro would have knock-on effects, interest rates on Spanish and Italian debt would have been rising ever since Alexis Tsipras won the Greek election late last month. But bond yields elsewhere on the euro’s periphery have remained low.

All this explains why Angela Merkel is reportedly relaxed about a euro without Greece and why Berlin has been taking such a hard line in the negotiations with Athens. The fact that the eurozone economy appears to be on the mend, with Germany growing surprisingly strongly in the final three months of 2014, will foster the belief that a “Grexit” would be manageable.

But it is still a risk. The eurozone economy did a bit better than expected in late 2014, but quarterly growth of 0.3% was no great shakes for this stage of the cycle. Unemployment remains high and investment weak. Even if the fallout from Greece proved to be modest, it is a fallout the eurozone could do without.

Alongside the economic risk is a financial risk: the markets may well be giving off false signals. Can Merkel et al really be sure that there will be no contagion effects from Greece, no sell-off in Italy, Spain and Portugal as the markets speculate on which country might be next? Today’s calm can easily become tomorrow’s panic. The reason the financial markets could turn nasty is that the departure of Greece from the eurozone would mark the first time in more than half a century that the drive towards greater integration had been reversed. Politically, this would be a big and dangerous moment.

As a result, the question Europe’s leaders have to consider is whether these are risks worth taking. Tsipras’s stance, ever since he became prime minister, has been consistent with a man who thinks the rest of the eurozone is bluffing.

Both sides have, in effect, been acting like Clint Eastwood in Dirty Harry, saying: “Make my day.” This approach has to end and it has to end on Monday. Otherwise Greece could end up leaving the euro, but accidentally rather than by design. It is worth remembering that Lehman went bust by mistake.

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